CAPÍTULO QUINTO

Annex 1: Private Equity Glossary

(selection, from EVCA)

 Buyout: A buyout is a transaction financed by a mix of debt and equity, in which a business, a business unit or a company is acquired with the help of a financial investor from the current shareholders (the vendor).

 Buyout fund: Funds whose strategy is to acquire other businesses; this may also include mezzanine debt funds which provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside.

 Capital weighted average IRR: The average IRR weighted by fund size.

 Carried interest: A share of the profit accruing to an investment fund management company or individual members of the fund management team, as a compensation for the own capital invested and their risk taken. Carried interest (typically up to 20% of the profits of the fund) becomes payable once the limited partners have achieved repayment of their original investment in the fund plus a defined hurdle rate.

 Closing: A closing is reached when a certain amount of money has been committed to a private equity fund. Several intermediary closings can occur before the final closing of a fund is reached.

 Commitment: A limited partner’s obligation to provide a certain amount of capital to a private equity fund when the general partner asks for capital.

 Deal flow: The number of investment opportunities available to a private equity house.

 Disbursement: The flow of investment funds from private equity funds into portfolio companies.

 Distribution: The amount disbursed to the limited partners in a private equity fund.

 Divestment: See exit.

 Drawdown: When investors commit themselves to back a private equity fund, all the funding may not be needed at once. Some is used as drawn down later. The amount that is drawn down is defined as contributed capital.

 Early stage: Seed and start-up stages of a business.

 Early stage fund: Venture capital funds focused on investing in companies in the early part of their lives.

 Exit: Liquidation of holdings by a private equity fund. Among the various methods of exiting an investment are: trade sale; sale by public offering (including IPO); write-offs; repayment of preference shares/loans; sale to another venture capitalist; sale to a financial institution.

 Expansion capital: Also called development capital. Financing provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to: finance increased production capacity; market or product development; provide additional working capital.

 Follow-on investment: An additional investment in a portfolio company which has already received funding from a private equity firm.

 Fund: A private equity investment fund is a vehicle for enabling pooled investment by a number of investors in equity and equity-related securities of companies (investee companies). These are generally private companies whose shares are not quoted on any stock exchange. The fund can take the form either of a company or of an unincorporated arrangement such as a limited partnership. See limited partnership.

 Fund of Funds: A fund that takes equity positions in other funds. A fund of fund that primarily invests in new funds is a Primary or Primaries fund of funds. One that focuses on investing in existing funds is referred to as a Secondary fund of funds.

 Fund size: the total amount of capital committed by the limited and general partners of a fund.

 Fundraising: The process in which venture capitalists themselves raise money to create an investment fund. These funds are raised from private, corporate or institutional investors, who make commitments to the fund which will be invested by the general partner.

 General Partner: A partner in a private equity management company who has unlimited personal liability for the debts and obligations of the limited partnership and the right to participate in its management.

 General Partner’s commitment: Fund managers typically invest their personal capital right alongside their investors capital, which often works to instil a higher level of confidence in the fund. The limited partners look for a meaningful general partner investment of 1% to 3% of the fund.

 Generalist fund: Funds with either a stated focus of investing in all stages of private equity investment, or funds with a broad area of investment activity.

 Holding period: The length of time an investment remains in a portfolio. Can also mean the length of time an investment must be held in order to qualify for Capital Gains Tax benefits.

 Horizon IRR: The Horizon IRR allows for an indication of performance trends in the industry. It uses the fund’s net asset value at the beginning of the period as an initial cash outflow and the Residual Value at the end of the period as the terminal cash flow. The IRR is calculated using those values plus any cash actually received into or paid by the fund from or to investors in the defined time period (i.e. horizon).

 Hurdle rate: A return ceiling that a private equity fund management company needs to return to the fund’s investors in addition to the repayment of their initial commitment, before fund managers become entitled to carried interest payments from the fund.

 Inception: The starting point at which IRR calculations for a fund are calculated; the vintage year or date of first capital drawdown.

 Institutional investor: An organisation such as a bank, investment company, mutual fund, insurance company, pension fund or endowment fund, which professionally invest, substantial assets in international capital markets.

 Internal rate of return (IRR): The IRR is the interim net return earned by investors (Limited Partners), from the fund from inception to a stated date. The IRR is calculated as an annualised effective compounded rate of return using monthly cash flows to and from investors, together with the Residual Value as a terminal cash flow to investors. The IRR is therefore net, i.e. after deduction of all fees and carried interest. In cases of captive or semi-captive investment vehicles without fees or carried interest, the IRR is adjusted to create a synthetic net return using assumed fees and carried interest. For the avoidance of doubts: IRR means the financial IRR and not the economic IRR, i.e. it does not account for any externalities.

 IPO (Initial public offering): The sale or distribution of a company’s shares to the public for the first time. An IPO of the investee company’s shares is one the ways in which a private equity fund can exit from an investment.

 Later stage: Expansion, replacement capital and buyout stages of investment.

 Leverage buyout (LBO): A buyout in which the New Company’s capital structure incorporates a particularly high level of debt, much of which is normally secured against the company’s assets.

 Limited Partnership: The legal structure used by most venture and private equity funds. The partnership is usually a fixed-life investment vehicle, and consists of a general partner (the management firm, which has unlimited liability) and limited partners (the investors, who have limited liability and are not involved with the day-to-day operations). The general partner receives a management fee and a percentage of the profits. The limited partners receive income, capital gains, and tax benefits. The general partner (management firm) manages the partnership using policy laid down in a Partnership Agreement. The agreement also covers, terms, fees, structures and other items agreed between the limited partners and the general partner.

 Management fees: Fee received by a private equity fund management company from its limited partners, to cover the fund’s overhead costs, allowing for the proper management of the company. This annual management charge is equal to a certain percentage of the investors’ commitments to the fund.

 Mezzanine finance: Loan finance that is halfway between equity and secured debt, either unsecured or with junior access to security. Typically, some of the return on the instrument is deferred in the form of

rolled-up payment-in-kind (PIK) interest and/or an equity kicker. A mezzanine fund is a fund focusing on mezzanine financing.

 Multiples or relative valuation: This estimates the value of an asset by looking at the pricing of “comparable” assets relative to a variable such as earnings, cash flows, book value or sales.

 Pooled IRR: The IRR obtained by taking cash flows from inception together with the Residual Value for each fund and aggregating them into a pool as if they were a single fund. This is superior to either the average, which can be skewed by large returns on relatively small investments, or the capital weighted IRR which weights each IRR by capital committed. This latter measure would be accurate only if all investments were made at once at the beginning of the funds life.

 Portfolio company: The company or entity into which a private equity fund invests directly.

 Pre seed stage: The investment stage before a company is at the seed level. Pre-seed investments are mainly linked to universities and to the financing of research projects, with the aim of building a commercial company around it later on.

 Private Equity: Private equity provides equity capital to enterprises not quoted on a stock market. Private equity can be used to develop new products and technologies (also called venture capital), to expand working capital, to make acquisitions, or to strengthen a company’s balance sheet. It can also resolve ownership and management issues. A succession in family-owned companies, or the buyout and buyin of a business by experienced managers may be achieved by using private equity funding.

 Private Equity Fund: A private equity investment fund is a vehicle for enabling pooled investment by a number of investors in equity and equity-related securities of companies. These are generally private companies whose shares are not quoted on a stock exchange. The fund can take the form of either a company or an unincorporated arrangement such as a Limited Partnership.

 Quartile: The IRR which lies a quarter from the bottom (lower quartile point) or top (upper quartile point) of the table ranking the individual fund IRRs.

 Rounds: Stages of financing of a company. A first round of financing is the initial raising of outside capital. Successive rounds may attract different types of investors as companies mature.

 Secondary investment: An investment where a fund buys either, a portfolio of direct investments of an existing private equity fund or limited partner's positions in these funds.

 Seed stage: Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.

 Start-up: Companies that are in the process of being set up or may have been in business for a short time, but have not sold their product commercially.

 Target company: The company that the offeror is considering investing in. In the context of a public-to- private deal this company will be the listed company that an offeror is considering investing in with the objective of bringing the company back into private ownership.

 Top Quarter: Comprises funds with an IRR equal to or above the upper quartile point.

 Track record: A private equity management house’s experience, history and past performance.

 Venture Capital: Professional equity co-invested with the entrepreneur to fund an early-stage (seed and start-up) or expansion venture. Offsetting the high risk the investor takes is the expectation of higher than average return on the investment. Venture capital is a subset of private equity.

 Venture Capitalist: The manager of private equity fund who has responsibility for the management of the fund’s investment in a particular portfolio company. In the hands-on approach (the general model for private equity investment), the venture capitalist brings in not only moneys as equity capital (i.e. without security/charge on assets), but also extremely valuable domain knowledge, business contacts, brand-equity, strategic advice, etc.

 Vintage year: The year of fund formation and first drawdown of capital.

 Volatility: The volatility of a stock describes the extent of its variance over time.

 Write-off: The write-down of a portfolio company’s value to zero. The value of the investment is eliminated and the return to investors is zero or negative.